Tagged: Small Savings Schemes

Don’t tinker with your long-term investment plan. But it is always better to make some critical changes, based on new tax laws and instruments
Sanjay Kumar Singh | April 3, 2016 Last Updated at 22:10 IST | Business Standard

The start of a new financial year is a good time to review your financial plan and take stock of where you stand in relation to your goals. If new goals have emerged, this is the time to make fresh investments for these. While having a steady approach is a virtue here, make some adjustments in the light of developments that have occurred over the past year.

Equity funds
Large-cap funds have fared worse than mid-cap and small-cap ones over the past one year (see table). Over this period at least, the conventional wisdom that large-cap funds tend to be more resilient than mid-cap and small-cap ones in a declining market was overturned. Nilesh Shah, managing director, Kotak Mahindra AMC, offers three reasons. “For the bulk of the previous year, FIIs were sellers of large-cap stocks, whereas domestic institutional investors (DIIs) were buyers of mid- and small-caps. Large-cap stocks are also more linked to global sectors like metal and oil, whereas mid- and small-caps are linked to domestic sectors. The latter has done better than the former, leading to stronger performance by mid- and small-cap stocks. Large-cap stocks’ earning growth decelerated or remained subdued throughout last year while mid- and small-caps delivered better growth,” he says.

Despite last year’s anomalous performance, investors should continue to have the bulk of their core portfolio, 70-75 per cent, in large-cap funds for stability, and only 20-25 per cent in mid-cap and small-cap funds. Large-caps could also fare better in the near future. Says Ashish Shankar, head of investment advisory, Motilal Oswal Private Wealth Management: “IT, pharma and private banks, whose earnings have been growing, will continue to do so. Public sector banks and commodity companies, whose earnings have been bleeding, will not bleed as much. Many might even turn profitable. FII flows turned positive this month and FIIs prefer large-caps. With the US Fed saying it won’t hike interest rates aggressively, global liquidity should improve. If FII flows continue to be stable, large-caps should do better.” Valuations of large-caps are also more attractive.

Debt funds
Among debt funds, the category average return of income funds and dynamic bond funds was lower than that of short-term, ultra short-term and liquid funds (see table). Explains Shah: “Last year, while Reserve Bank of India (RBI) cut policy rates, market yields didn’t soften as much. The yield curve became steeper. The short end of the curve came down more than the long end, which is why shorter-term bonds did better than longer-term gilts.”

Stick to funds that invest in high-quality debt paper, in view of the worsening credit environment. Shankar suggests investing in triple ‘A’ corporate bond funds. “Today, you can build a triple ‘A’ corporate bond portfolio with an expected return of 8.5 per cent. Many of these have expense ratios of 40-50 basis points, so you can expect annual return of around eight per cent. If bond yields come down, you could end up with returns of 8.5-9 per cent. If you redeem in April 2019, you will get three indexation benefits, lowering the tax incidence considerably.” Investors who have invested in dynamic bond funds should hold on to these. “A rate cut is expected in April. Yields will drop and there may be a rally in the bond market,” says Arvind Rao, Certified Financial Planner (CFP), Arvind Rao Associates.

CHANGES YOU NEED TO MAKEInvestment

Fixed deposit rates from banks will be better than returns from the post office deposits in the new financial year

Choose your tenure first and then, do a comparison of bank fixed deposit rates before making the final choice

Invest in the yellow metal via gold bonds

Insurance

If your liabilities have increased, revise term cover upward

Revise health cover every three-five years to deal with medical and lifestyle inflation

Revise sum assured on home insurance if you have added to household assets

Tax planning

Conservative investors should invest in PPF at the earliest

Those who can take some risk should bet on ELSS funds via SIP

Invest Rs 50,000 in NPS

Traditional fixed income
The recent cut in small savings has jolted conservative investors. The rates on these have been linked to the average 10-year bond yield for the past three months. These will be revised every quarter now, make them more volatile. “People who want to invest in debt and want sovereign security should continue to invest in Public Provident Fund (PPF). No other instrument gives a tax-free return of 8.1 per cent with government security,” says Rao.

As for time deposits, financial planner Arnav Pandya suggests, “From April, fixed deposits of banks will give better returns than those of the post office. Decide on your investment tenure, see which bank is offering the best rate for that tenure, and invest in its deposit.” Lock into current rates fast, as even banks are expected to cut their deposit rates.

Tax-free bonds are another good option. Nabard’s recent issue carried a coupon of 7.29 per cent for 10 years and 7.64 per cent for 15 years. Beside getting tax-free income, investors stand to get the benefit of capital appreciation if interest rates are cut.

“People who have some risk appetite may also look at debt mutual funds and fixed deposits of stable companies,” adds Rao.

Gold
The sharp run-up in gold prices over three months, owing to the rise in risk aversion globally, took most people by surprise. The sudden spurt emphasises the need to stay diversified and have a 10 per cent allocation to the yellow metal in your portfolio. However, instead of using gold Exchange-traded funds (ETFs), which carry an expense ratio of 0.75-1 per cent, invest via gold bonds, which offer an annual interest rate of 2.75 per cent. The Budget made gold bonds more attractive by exempting these from capital gains tax at redemption.

Tax planning
Start investing in tax-saving instruments from the beginning of the year. “Don’t leave tax planning for the end of the year, otherwise you may have to scramble for funds,” says financial planner Ankur Kapur of ankurkapur.in. For those with the money, Pandya suggests: “Invest the entire amount you need to in PPF before the April 5. That will take care of tax planning for the year and you will also earn interest on your investment.”

Investors with a higher risk appetite could start a Systematic Investment Plan (SIP) in an Equity Linked Savings Schemes (ELSS) fund, which can give higher returns. “If you invest early in the year via an SIP, you will reap the benefit of rupee cost averaging,” says Dinesh Rohira, founder and Chief Executive Officer, 5nance.com. Pankaj Mathpal, MD, Optima Money Managers suggests linking all tax-related investments to financial goals.

If you live in your parents’ house and pay rent to them to claim House Rent Allowance benefits, which is perfectly legal, get a rent agreement prepared.

With 40 per cent of the National Pension System (NPS) corpus having been made tax-free at withdrawal in this Budget (the entire corpus was taxed earlier), this has become more attractive. “Open an NPS account if you have not done so already and enjoy the additional tax deduction of Rs 50,000,” says Anil Rego, CEO & founder, Right Horizons. In view of the low returns from annuities, into which 60 per cent of the final corpus must be compulsorily invested, don’t invest more than Rs 50,000.

Tax deduction under Section 24 is available on the interest repaid on a home loan. “Buying a property to avail of the benefit is not advisable if the family has a primary residence,” says Rego.

Insurance
While reviewing your financial plan, check if the term cover is adequate. A family’s insurance cover should be able to replace the breadwinner’s income stream. Financial planners take into account household expenses, goals like children’s education and marriage, and liabilities like home loans when deciding on a person’s insurance requirement. “If goals have changed or liabilities have increased, raise the amount of cover,” suggests Mathpal. Kapur says the premium rate is likely to be lower if you buy the term plan before your birthday.

Your health insurance cover might also need to be raised to take care of medical inflation. The same holds true for household insurance if you have reconstructed your house and the structure has become more expensive, or if you have added expensive assets. Rohira suggests buying add-on covers like accidental insurance and critical health insurance for comprehensive protection.

NEW DELHI: The government on Friday announced a steep cut in interest rates on small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and Kisan Vikas Patras – which will fetch up to 90 basis points lower returns during the April-June quarter.

On January 14, TOI first reported that the government could reduce interest rates on small saving schemes but the extent of the reduction has taken everyone by surprise.

In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points (100 basis points equal a percentage point) is among the sharpest in nearly 15 years. Although the rates are to be reviewed every three months, if they remain unchanged during the next financial year, someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 in 2016-17.

But the announcement has not gone down well with the middle class. Angry protests have begun on social media with PPF trending on Twitter. The government, however, claimed the changes were linked to the market rate, offering a parallel to global oil prices.

A reduction in rates on small savings is also bad news for those with large balance in fixed deposits, especially senior citizens, as banks are now expected to follow government action with similar cuts.

For long, banks and RBI had urged the government to reduce small savings rates to ensure that banks cut deposit rates. This, in turn, will pave the way for lower lending rates and translate into lower EMIs in the coming months, should the banks decide to pass on the benefit. However, given that a two-three year fixed deposit (FD) with SBI fetches the highest rate of 7.5% a year, savings in PPF still remain more attractive, especially with tax benefits thrown in.

Though pressure had been building for several months, the government opted for a change from April, which is the annual date for reset. “It’s normal practice for the last few years to change interest rates from April and we have followed that. The rates are linked to the yield on government securities and we have followed the same practice with a mark up for senior citizens, Sukanya Samridhi Scheme, PPF and NSC,” economic affairs secretary Shaktikanta Das told reporters.

The government provides an annual spread of a percentage point on Senior Citizen Savings Scheme, 75 basis points (bps) on Sukanya Samridhi Scheme and 25 bps on PPF, NSC, five-year post office deposit and Monthly Income Scheme. But post office savings deposits of one-three years, KVP and fiveyear Recurring Deposits will not longer get the benefit of a higher spread.

Das said the average yield on government bonds had come down from 8.5% in 2014-15 to 7.9% during the current financial year. “It (reduction) is being done to make the rates more market aligned. This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates,” he told reporters but added that banks had to take a call on rates.

A sharp reduction in small savings rates have always been a ticklish issue politically with Yashwant Sinha facing severe criticism when he cut rates as finance minister in the Atal Bihari Vajpayee government.

Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1.
By: FE Bureau | New Delhi | February 11, 2016 2:04 PM | Financial Express

Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1. Henceforth, the interest rate would also be reset on a quarterly basis instead of annual basis. An official announcement in this regard is expected in a day or two.

Without mentioning how much the reduction would be in the interest rates, economic affairs secretary Shaktikanta Das on Thursday said the spread of 25 bps (above the average yield from government securities with similar maturity) available now for the small saving schemes below five years, would be reduced. “But for long term saving schemes of above five years, the spread will be protected because the government has taken into consideration the interest of the small savers and the need to encourage long term savings,” Das said. Even if the spread is maintained for long-term savings, the actual interest rate on these could come down a bit as yields on government securities have declined over the past year, analysts say.

Though small savings rate are usually determined to be 25 basis points above the average yield from government securities with similar maturity in the previous year, there have been three instruments that carry even higher rates: Sukanya Samriddhi Account, the Senior Citizens Savings Scheme and the National Small Saving Certificates (NSC). While the proposed changes won’t impact the high interest bearing schemes for the girl child and senior citizens, there could be some reduction in the NSC rates also.

Once these rates are announced, it is expected that bank deposit and lending rates to also fall. While the Reserve Bank of India has been cutting rates, banks have passed on less than half of the cuts on account of high rates on small savings schemes. Bankers say if they cut rates, much of their deposits would flow into small savings schemes.

For example, one-year postal deposit offers 8.4% where as State Bank of India offers 7.25% for deposits of the same tenure (7.5% for senior citizens). For the girl child’s welfare, the Sukanya Samriddhi Account Scheme offers 9.2% interest for a period up to 10 years while SBI offers only 7% on term deposits of 5-10 years (7.25% for senior citizens).

The cumulative corpus of National Small Savings Fund is projected to rise to Rs 9.59 lakh cr after accretion of Rs 52,000 cr in 2015-16.

NEW DELHI: Interest rates on popular small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and the Kisan Vikas Patra could soon be reset every quarter as part of the government’s plan to peg them closer to market rates to reduce market distortions and help the cause of lower interest rates.

The government will also reduce the mark-up over the benchmark government bond rate for such schemes of small maturities to nudge short term rates lower.

High interest rates on small savings schemes have long been cited as a structural barrier to interest rates coming down as they compete with bank deposits, but are not subject to the same kind of market pressures as them. Because they stay high, bank deposit rates are forced to remain high and therefore prevent lending rates from coming down.

A senior government official said the first reset under the new rules will happen from April 1 this year and rates are expected to fall. A notification will be issued soon, this official said, adding that interest rates on schemes for senior citizens and a scheme for girl children were not likely to be revised.

Small savings’ interest rates are linked to yields on government bonds of comparable tenure, but unlike gilts that are traded daily and see yields change, these change only sparingly.. The last revision in rates on these schemes was on April 1last year. Since then, market rates have moved south following a 0.75 percentage point policy rate cut by the Reserve Bank of India, creating a wide wedge between what the banks can offer and what is available on small savings.

State Bank of India, for example, offers 7 per cent on deposits of maturity of five years or more. Deposits of such tenure fetch 8.5 per cent in a post office small savings account. The PPF rate for a similar maturity is 8.7 per cent. This wide gap between small savings’ and market rates impacts deposit mobilisation by banks as their ability to reduce deposit rates is adversely impacted. This impacts banks’ ability to lower lending rates as well.

A quarterly reset of small savings rate will ensure that distortion in the rates caused by the small savings is kept to a minimum, officials said. The weighted average yield of dated government securities was 7.9 per cent in April-September 2015 compared with 8.81 per cent in the first half of the preceding year, potentially opening up the possibility of an up to one percentage point reduction in the small savings rate.

In their pre-budget meeting with Finance Minister Arun Jaitley earlier this month, banks and financial institutions had also suggested quarterly benchmarking of rates.